Cybersecurity R&D Tax Credits

Innovate the next‑generation of digital defense. Cybersecurity firms, enterprise security teams and start‑ups working on advanced threat detection, encryption, automation and resilience are engaging in R&D‑style work that often qualifies for federal and state R&D tax credits.

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Examples of qualifying activities in cybersecurity

AI/ML‑Based Threat Detection & Response Designing and training models, iterating algorithms to reduce false positives, scaling for cloud‑wide data.
Novel Encryption/Authentication Systems Creating next‑gen biometric/behavioural authentication, quantum‑safe encryption, novel key‑management systems.
Incident‑Response Automation & Orchestration Developing systems that automate triage, containment and remediation workflows, experimenting with work‑flow logic, integration with sensors/logs.
Secure Network Architecture & Zero‑Trust Frameworks Building and testing architectures for hybrid cloud, edge computing, IoT devices with threat models, simulation and resilience testing.
Penetration/Red‑Team Tool Development Creating new pentesting frameworks, attack‑simulation platforms, validating system vulnerabilities under novel threat vectors.

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What qualifies as R&D in Cybersecurity?

To qualify, cybersecurity R&D must:

Aim at a permitted purpose — such as a new threat‑detection engine, a secure authentication protocol, an automated incident‑response platform, or advanced encryption method.
Tackle technical uncertainty — for example: “Can we reliably detect new zero‑day exploits using machine‑learning under changing threat‑patterns?”, “Will this new authentication protocol scale securely for millions of users?”, “Can encryption be improved to resist future‑quantum attacks while maintaining performance?”
Use a process of experimentation — algorithm training, red‑team/blue‑team simulations, versioning of threat‑detection models, iterative encryption protocol testing, scalability stress‑trials.
Be technological in nature, grounded in computer science, network/security engineering, cryptography, machine‑learning, automation of incident‑response or systems architecture.

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Qualified Research Expenses (QREs)

Expense Type

Examples in Cybersecurity R&D

Eligibility Notes

Wages

Security engineers, data scientists, protocol researchers, pentest architects

Direct, supervisory and support roles qualify

Supplies

Lab hardware, virtual testbeds, sensors, log‑aggregation systems

Materials consumed in experimentation

Software / Cloud

Cloud compute for ML training, sandbox simulation tools, incident‑response platforms

Eligible if used for qualified research

Contract Research

External security research labs, red‑team services

Often ~65% of contractor costs may qualify

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Roles commonly involved in qualifying activities

Security Engineers & Protocol Developers
Data Scientists & ML Engineers for threat modelling
Incident‑Response Automation Architects
Red‑Team/Pen‑Test Specialists
Network/Cloud/Edge Security Architects
External research partners or labs

What does not qualify

Routine monitoring, patching, compliance checks without experimentation
Configuring off‑the‑shelf security tools without making technical improvements
Marketing, training, user‑awareness programs, general IT support
Infrastructure purchases without documented experimental test‑programs

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Compliance and Documentation

§174 Update

Following the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, §174 now allows immediate expensing of domestic research expenses for tax years beginning on or after January 1, 2025. Taxpayers may also elect optional amortization under new §174A. Foreign research expenses must still be amortized over 15 years. This is separate from the §41 credit but impacts overall tax planning.

Be sure to capture:

Project briefs defining technical uncertainties (e.g., “Can our new ML engine identify sophisticated APT behaviour in <1 second with <0.1% false positives?”)
Test logs, versioning of algorithms, red/blue‑team trial outcomes, iteration history
Time logs by research team members, payroll codes, staff assignment to project tasks
Resource usage documentation (compute hours, testbed logs), contractor/consultant agreements

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Frequently Asked Questions

Do cybersecurity companies qualify for the R&D Tax Credit?

Yes—if their work includes true experimentation, algorithm/protocol innovation or systems architecture testing rather than operational security.

Which expenses are eligible?

Wages of engineers/researchers, supplies used in prototypes/trials, cloud/simulation costs, and third‑party contract research.

What kinds of cybersecurity projects are eligible?

Projects such as developing new threat‑detection engines, encryption/authentication protocols, response‑automation systems, secure network architectures.

What activities do not qualify?

Routine infrastructure maintenance, general compliance work, off‑the‑shelf tool implementation without improvement, marketing/security training.

How should companies document their efforts?

Detailed project scopes, hypotheses/uncertainties, logs of experiments/trials, iteration history, staff time‑allocation records and test‑data.